ISSUE 17 2021 £25 30 $35 PRI VATE A WINNING STRATEGY Does private equity genuinely outperform public equity? THE VANISHING PUBLIC COMPANY EQUITY Is the public company an out-of-date model in the 21st century? IS THE RACE TO THE SWIFT? Why some LPs seem to consistently outperform their peers FINDINGS SHOOTING THEMSELVES IN THE FOOT Insights from private equity research worldwide Are male investors neglecting female entrepreneurs at their own cost? BUILDING VALUE Is value creation in buy-and-builds principally from multiple arbitrage? INCLUDING CONTRIBUTIONS FROM: CALIFORNIA INSTITUTE OF TECHNOLOGY | BOSTON COLLEGE CARROLL SCHOOL OF MANAGEMENT ERASMUS UNIVERSITY ROTTERDAM | HARVARD BUSINESS SCHOOL | MIT SLOAN SCHOOL OF MANAGEMENT | THE OHIO STATE UNIVERSITY SAÏD BUSINESS SCHOOL UNIVERSITY OF OXFORD | THE UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS THE UNIVERSITY OF ILLINOIS AT CHICAGO | UNIVERSITY OF NORTH CAROLINA CONTENTS By the numbers The vanishing 4 16 public company Global private equity soars through the pandemic; Covid-19 impact on PE potentially worse than the Global Financial Crisis; The number of public companies in the West is waning, Growth in PRI signatories is accelerating; Over half of limited yet private equity AUM is growing rapidly. Why is this? We partners plan to access PE’s secondary market; Biotech and discuss the trend with a panel of three academics who have pharma venture capital deals smash records. studied the reasons for the decline, plus three seasoned private markets investors, to understand what’s behind the shift from public to private. Building value “Having a healthy public market matters because, ultimately, 6 private equity has to exit. We are transitional owners” Do buy-and-build strategies genuinely deliver on their promise of value creation? Or are they simply a multiple arbitrage play? Roberto Quarta, Clayton, Dubilier & Rice We explore recent academic research that seeks to throw light on these questions. 24 A winning strategy Is the race to the swift? Private equity firms make much of their ability to outperform 10 public markets. But is the asset class really achieving this? Two In an industry with such a high dispersion of returns, backing leading academics, Ludovic Phalippou and Steven Kaplan, take the right private equity funds and co-investment opportunities opposing sides in the debate. can make a significant difference to limited partner returns. So what does it take to be a successful investor in the asset class? Two new research papers lift the lid on the relative Shooting themselves importance of skill versus access. 28 in the foot “Any investor that can generate an extra 2% in private equity Early-stage investing has often been accused of gender bias. returns is making a significant contribution – that usually Yet to what extent does discrimination exist in investment translates into many millions of dollars” selection? We highlight the findings of a new paper that uncovers some interesting behaviours that could be detrimental to some Michael S. Weisbach, The Ohio State University investors’ overall returns. “Many women have had success raising capital through crowdfunding, but you are not going to get complex businesses funded this way” Sarah Turner, Angel Academe 2 PRIVATE EQUITY FINDINGS 2021 FOREWORD Professor Josh Lerner Jeremy Coller Entrepreneurial Management Unit, Chief Investment Officer, Harvard Business School Coller Capital t a time when many companies exposure to the asset class. While PE papers that uncover the variation are feeling the pain of repeated has grown over the past two decades, of performance among LPs’ investments lockdowns and economic the number of companies listed on in funds and in alternative vehicles A malaise, there is a greater need public markets has declined markedly. such as co-investments, culminating than ever for investors capable of building In this issue’s roundtable discussion, in a discussion of what makes a stronger, more efficient businesses. The vanishing public company, leading successful LP. academics and practitioners discuss Private equity firms, which have the reasons behind the decrease and Finally, in an era when diversity and increasingly adopted buy-and-build whether PE’s rise is part of the answer. inclusion have become key action items strategies, might argue that they fit for the industry, we profile the findings the bill perfectly by creating resilience Comparisons of public and private of a recent paper on whether there is a through scale and operational synergies. markets also feature in another of gender bias among early-stage investors. But some detractors counter that, our pieces: A winning strategy. To the extent that a gender bias does by pursuing serial add-on acquisitions, Here, prominent academics Ludovic exist, Shooting themselves in the foot the industry is simply engaging in Phalippou and Steven Kaplan offer also asks whether this harms returns. multiple arbitrage. Our cover feature, opposing views of whether PE really Building value, uses the results of outperforms public markets. We hope you find our latest issue an recent academic research to examine engaging and thought-provoking read. which version of the story is closer to Of course, in an asset class with a As ever, we welcome any feedback the truth and which buy-and-build high dispersion of returns among you may have; please get in touch approach might offer the greatest fund managers, there will be clear with questions or comments at: potential for operational and outperformers. Much research has been [email protected]. performance improvements. done to determine the extent to which outperformance can be explained by the Despite tougher economic conditions, expertise of fund managers, but rather limited partners continue to allocate less on the skill of LPs. Is the race to the capital to PE, with many increasing their swift? explores the findings of two new COLLER RESEARCH INSTITUTE 3 PE TRENDS AND STATISTICS BY THE NUMBERS Global private equity activity soars through the pandemic Covid-19 impact on private equity potentially worse than • Despite disruption from the onset of After a pause in Q2 as investors the Global Financial Crisis the pandemic in the first half of the digested the effects of the pandemic How will the Covid-19 crisis affect the industry year, 2020 proved to be exceptionally on the economy, PE houses resumed compared with the GFC? busy for private equity firms globally. dealmaking from Q3 onwards in a bid More severely Over US$580bn of buyout deals were to deploy dry powder. Slightly more recorded – the highest annual figure 24% severely since the run-up to the Global Financial • PE activity levels in H2 2020 reflect 44% On a similar level Crisis, when a record US$662bn of PE broader M&A trends. According to deals were struck, Refinitiv figures show. Mergermarket, US$2.2trn of M&A 32% deals were announced in H2 2020, Source: Dechert, Global • The second half of 2020 accounts the highest half-year figure on record. Private Equity Outlook 2021 for much of the increase in activity for However, at US$3.2trn, the whole year’s • The GFC certainly disrupted the the year. In H2 2020, US$378bn of total was down slightly on the US$3.4trn private equity industry, but many PE deals were struck, up significantly of M&A value for 2019. executives believe the eventual impact from the H1 value of US$210bn. of Covid-19 will be worse, according to Dechert’s Global Private Equity Outlook Global PE investment by value 2021. Three-quarters of the survey’s respondents believe the pandemic will affect the PE industry more severely – either to a greater (44% of respondents) or a lesser extent (32%). • It is well known that certain sectors – hospitality, bricks-and-mortar retail, and travel, for example – have suffered significant damage from lockdowns, but the extent of the scarring on the wider US$bn economy remains to be seen. With 90% of Dechert’s respondents expecting an increase in distressed deals in the wake of the pandemic, PE professionals may be anticipating more widespread pain. • Other effects of the pandemic expected by industry players are: delays to deals 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (82%); more fund restructurings (64%); Source: Refinitiv and suspended fundraisings (55%). 4 PRIVATE EQUITY FINDINGS 2021 Growth in PRI signatories is accelerating Biotech and pharma venture capital deals smash records PRI signatories by number and AUM • With annual venture capital deals Signatories in the US breaking the US$150bn mark for the first time in 2020, one of the brightest spots was the biotech US$trn and pharma sector, according to the Pitchbook-NVCA Venture Monitor 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 for Q4 2020. This was perhaps Source: PRI Association AUM (US$trn) Number of signatories unsurprising given the huge health impact of Covid-19. • With responsible investing and • Indeed, the acceleration of PRI’s environmental, social and governance growth was particularly noticeable US VC biotech and pharma deal activity issues entering mainstream investing, in the year just gone. the Principles for Responsible Investment (PRI) Association passed two major • The number of new PRI signatories milestones in 2020 – the number of PRI increased by 28% in 2020 (to 3,038) Deals signatories topped the 3,000 mark for the compared with 2019 and signatory US$bn first time and the total AUM of signatories AUM rose by 20% (to US$103.4trn). exceeded US$100trn. Over half of limited partners plan to access PE’s secondary market 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Value (US$bn) Deal count • Just over half of limited partner Planned LP activity in the secondary market in the Source: PitchBook-NVCA Venture Monitor, Q4 2020 institutions (52%) expect to buy or sell next two years (excluding GP-led secondaries) assets as secondaries in the next two • US VC investment in the sector years, according to Coller Capital’s latest in 2020 reached a record high of Global Private Equity Barometer.